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Back to: Forex trading basics
Learn what Forex gap risk is, how market gaps occur, and how stop-loss orders help protect traders in volatile Forex markets.
Carol Biaggi (Host):
In foreign exchange, traders call it gap risk. The gap occurs when the currency trades higher or lower than the last trade. It’s a risk, and traders need to be alert.
Surprise jolts to the financial markets, such as natural disasters or political turmoil, can all create gaps in currency prices.
David Bloom (HSBC Group):
When an earthquake devastates the city. What’s the building worth after that earthquake? It falls from a very valuable instrument to zero. There’s nothing in between, because you’ve suddenly had a dramatic event.
Boris Schlossberg (Currency Research Director, GFT Capital):
When prices open up on Sunday, they could open up considerably higher or lower than when they closed on Friday, and that creates gap risk for the currency market as well.
Carol Biaggi (Host):
Gap risk can take place anytime. Markets do not trade continuously.
Boris Schlossberg (Currency Research Director, GFT Capital):
This is Friday afternoon. Euro-Dollar goes out on the close on Friday afternoon in New York at 1.34. And what happens is, on Sunday night, the Euro-Dollar, instead of opening up at 1.34 like it did on Friday, opens up actually at 1.36.
This is their gap risk. This is the amount of loss they could potentially be facing on the first moment of trade Sunday night when it opens up.
Stephen Jonathan (Bloomberg FX Specialist):
And unless you really understand and have your stop-loss levels set in place, or your risk parameters well thought out and well understood, I think there’s a chance to lose a fair amount of money.
Carol Biaggi (Host):
A stop-loss order is a financial safety net executed or filled by an online broker at the next best price.
Stephen Jonathan (Bloomberg FX Specialist):
A fill is the price that you’re given by your broker or bank to close out your contract. So the fill is the price you actually were executed at.
David Bloom (HSBC Group):
In the market, you see the calm, and then you see the storm. And those storms can either make or break you.
Carol Biaggi (Host):
Gap risk is negative if you’re on the wrong side of a trade, but if you’re on the right side and prices gap higher, that will translate into higher profits.
Thanks for watching Bloomberg The Educated Investor. I’m Carol Biaggi.
Narrator
Bloomberg Educated Investor is brought to you by DB FX from Deutsche Bank.
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